Coronavirus: Beyond Lockdown for Landlords & Tenants20 May 2020 // Insights
Commercial Real Estate Partner Thomas White, Property Disputes Partner Lara Nyman and Trainee Solicitor James Hibbert consider the impact of COVID-19 ...
We have seen a flurry of activity over the last nine weeks since the UK was put into lockdown on 23 March 2020, much of which was initially centred around the March Quarter Date. We are now approaching the June Quarter Date and landlords and tenants alike are looking to a post-lockdown market. With that in mind, we have discussed below some of the more frequent questions raised by those within the property sector.
Is rent still payable?
Short answer: Yes, absolutely.
Long answer: The lease will set out, contractually, the agreed way in which rent is paid; usually in advance on the quarter days (25 March, 24 June, 29 September and 25 December) or monthly in the case of a standard Assured Shorthold Tenancy. It would be unusual for a lease to include force majeure or similar clauses to allow for the rent to stop; the only other way for rent to be paused/stopped would be damage through insured risk, but that is often tied to ‘damage’ of the property.
There is nothing contained within the COVID-19 legislation which seeks to undo the contractual relationship between a landlord and its tenant or the obligation to pay rent. It is worth noting that the lease will almost certainly include the ability for interest to be payable on rent that is not paid, which will clock up until the arrears are cleared.
It is therefore quite acceptable for a landlord to demand rent and other sums due under the lease. It is also likely that a landlord will look to rent deposits and other forms of guarantee in order to collect rent which is outstanding. You will need to be careful when reading these terms.
Another point to note is that some tenants do already have concessions agreed with their landlord, and by not paying rent they might breach those side agreements and trigger payment in full with interest. A tenant who has a protected business tenancy may also find a landlord opposing the renewal of the lease under the Landlord and Tenant Act 1954 for failure to pay rent, and there may be implications for any assignment or consent required under the terms of the lease.
Can a landlord forfeit a lease at the moment?
Short answer: Yes, but not for non-payment of rent.
Long answer: Normally, the landlord would almost always have a strong weapon within the lease through its re-entry or forfeiture provisions (subject to a tenant being able to claim relief). The right to forfeit for non-payment is usually triggered upon a certain number of days (often 21 days) unpaid rent. This right has, however, been suspended until 30 June 2020, and it might be further extended.
What is key here is that this relates to non-payment of rent only, but it is widely defined to cover any sums a tenant is liable to pay under the business tenancy. Further, by not forfeiting for non-payment of rent now, and not waiving its right to do so, the landlord does not necessarily lose the right to forfeit.
The lease may include other circumstances where forfeiture is still an option for the landlord to consider, for example, breach of other obligations other than rent. Obviously, a prudent landlord would consider its options carefully particularly in view of the end result, which may see the landlord, if the tenant does not seek relief from forfeiture, get the property back. Is this actually a good result for either the landlord or the tenant? The landlord has the property back and needs to consider rates liability, security costs, and other obligations that were for the tenant to deal with. Consideration also needs to be given to marketing the premises, and potentially loses a previously well-paying and good tenant. Furthermore, if the lease is forfeit, the landlord has no ability to claim under the contractual terms within the lease.
What can a landlord do for non-payment of rent, other than forfeiture?
Short answer: A number of avenues remain available to a landlord including commencing a monetary claim through the courts, pursuing sureties, and rent deposits.
Long answer: A landlord and a tenant will need to refer to the lease, and any documents which are ancillary to the lease. If the landlord holds a rent deposit, it would be able to look to that to cover the rent payments, but consideration needs to be given to what happens if the tenant is then unable to ‘top up’ the rent deposit following a draw down.
Tenants often provide other forms of guarantee. There might be a corporate guarantee from a parent company, or a personal guarantee from an individual which the landlord might look to enforce.
If the current tenant is not the original tenant named on the lease, the previous tenant may have provided an authorised guarantee agreement, and there is nothing stopping the landlord from serving a notice on the previous tenant (the assignor) for the arrears. That assignor can, if it wants, call for a lease itself (which slots between the landlord and tenant, so that the non-paying tenant becomes the direct tenant of the assignor, and the assignor is the direct tenant of the landlord).
A landlord who may have consider exercising its rights under the Commercial Rent Arrears Recovery procedure (CRAR), must now wait for there to be at least 90 days’ worth of rent arrears. In addition, a landlord will not be able to exercise CRAR over goods held at a residential premises until the current movement restrictions are lifted. We are also seeing many enforcement agents are unwilling to implement CRAR during the current crisis.
The landlord might consider its options in terms of insolvency of the tenant, whether corporate or individual, although the Government has placed a temporary ban on statutory demands and winding up petitions in relation to commercial tenants.
Can a lease be assigned / can I assign my lease?
Short answer: Yes, as long as the lease permits it.
Long answer: It is usual in short term leases for the right to assign to be subject to consent (licence) from the landlord. The theory being that the landlord wants to know who their tenant is going to be, and it avoids a tenant assigning to anyone without the landlord having some input. It is therefore quite usual for the new tenant (the assignee) to be vetted by the landlord through references.
Further, the landlord is usually permitted to require that the rent be up to date and also, quite often, that the tenant is not otherwise in breach of its obligations within the leases. As such, if a tenant is in arrears of rent, the landlord will usually be able to refuse to give its consent.
A tenant also has to consider whether someone will want to take on the obligations under the lease in the current climate. An outgoing tenant may well be asked to provide an authorised guarantee agreement (AGA) which acts to guarantee the assignee complying with the lease terms, so the outgoing tenant may still find itself becoming liable for the rent if the assignee doesn’t perform.
Can a lease be terminated by frustration?
Short answer: The question of whether a lease can be frustrated has been the subject of much litigation, but none of the leading authorities determined the point definitively, rather applying the principles of frustration to the facts of each case, the most recent of which being Canary Wharf (BP4) T1 Ltd v European Medical Agency.
Long Answer: Frustration generally arises through the agreed purpose or performance becoming impossible to perform. A full note on the background of this doctrine by Leon Golstein can be found here. Further an article by George de Stacpoole includes analysis in the contractual sense here.
How the Courts will apply the principles to current circumstances is yet to be seen, and will no doubt be the subject of much litigation, the crux of which centring on whether the current pandemic has actually prevented the performance of the lease (which is key to the question of frustration), or whether it has just caused delay or financial loss. Consideration will be given to the unavailability of goods, insufficient materials, a lack of transport, or the lack of availability of professionals to carry out a particular job. There have not been many cases which have considered frustration in this context recently, however the case of Howell v Coupland (1876) 1 QBD 258 did allow frustration to apply when a disease prevented a contract from being fulfilled.
It is important to note that unlike a force majeure clause, which temporarily suspends performance or a requirement under the lease, frustration discharges it completely with all rights and obligations cancelled – meaning that practical questions must be considered before using frustration. Therefore, It might not be as attractive as an idea given it is not really tested in the lease sense.
These thoughts may, however, lead to leases which are being agreed now, or in the near future, catering for such events to enable tenants to extricate themselves from leases if they want or need to.
Is COVID-19 a force majeure?
This is a term often banded about; for a wider commercial discussion, you should read Aoife Keane’s article here and George de Stacpoole’s article here.
Short Answer: It is unusual for a commercial lease to include such a clause, and therefore careful consideration will be needed.
Long Answer: A force majeure clause does not have to be specifically titled ‘force majeure’, but rather is any clause which anticipates that there might be a supervening event beyond the control of the parties, which affect provisions of the lease. The reason for not including these clauses is due to the fundamental nature of what a lease is: a right to occupy (for the tenant) by virtue of payment of rent (to the landlord). If the rent obligation is suspended, the tenant does not pay rent, does the tenant still get to right to occupy (even if it cannot actually use the property).
If the lease does contain such a clause, whether COVID-19 is a force majeure will largely depend upon the wording of such a clause. Force majeure clauses have historically been construed restrictively, however, a modern approach is to apply normal principles of construction, resulting in a less restrictive approach, but it still very much turns on an analysis of the wording.
Any party wishing to enforce a force majeure clause must comply with a number of requirements and formalities before they can be successful in doing so, these include having no reasonable steps which could have been taken to avoid or mitigate the supervening event or its consequences, which, in the context of COVID-19 may include compliance with government guidance regarding the virus; and that the non-performance must be beyond the control of the party and for which the party had not assumed responsibility.
In the property context, which goes beyond this note, one is more likely to come across such a clause within an agreement for lease whereby each parties’ obligations are suspended during such period only to recommence at a later date, albeit usually subject to a long stop date.
Are there other options to consider, other than not paying rent?
Short Answer: Rent is only one of the outgoings of a tenant and consideration must be given to others, as there may well be other concessions available to the tenant.
Long Answer: Rates - these are a key cost for tenants and in the Spring 2020 Budget the Chancellor announced an increase in the business rates retail discount to 100% for a year from 1 April 2020 and extended it to retail, hospitality, and leisure businesses in order to support them during the COVID-19 outbreak. More recently the Government has announced that estates agents, lettings agencies and bingo halls which have closed due to the measures put in place to combat the outbreak, will also be exempted from business rates in 2020-21, with guidance on the application of the rates holiday to be published shortly.
Another significant cost for any tenant’s business is its payroll and staffing costs. The tenant may look to furlough members of its staff. Careful consideration of the requirements will be needed, and there are a number of articles from our employment team which discuss these points which can be found here.
Business interruption insurance should also be considered. Businesses may have cover for such circumstances and a claim could be made in order to cover things like rent in circumstances where the business is not able to trade.
A tenant would be well advised to discuss options in relation to delayed payment of taxes to HMRC.
How does coronavirus impact on Dilapidations?
Short Answer: There is nothing in the current legislation that limits the repairing and yielding up provisions in a lease.
Long Answer: The reality is that lockdown and disruption to business, as well as accessibility to premises, will have an impact on pending or imminent dilapidation claims. The current movement restrictions may impact a tenant’s ability to vacate, or if it has vacated, the ability of professionals and contractors to access premises or supervise works. As seen from the press, the risk of tenant insolvency or multiple occupiers vacating premises at the same time is greater, and therefore landlords may find themselves with a greater repairing liability, a reduced ability to recover the cost, or the possibility of longer rent-free periods for any incoming tenant in order to secure a longer term income stream.
Landlords should be reviewing portfolios and the terms of their leases to ensure that proper preparation is taken in respect of impending lease expiry dates, and that the appropriate consideration is given to the requirements of yielding up, in conjunction with any notice to reinstate under the lease and any licence to alter.
Collaboration and discussion will be key to dealing with dilapidation claims, particularly in view of the practical restrictions. Whilst this is not a new issue, it would appear that landlords will need to work with tenants to maximise any recovery and possibly do deals that they would not otherwise entertain, and this seems to be the message underlying all current measures.
The Government announced a series of measures to alleviate the pressures experienced by landlords and tenants alike with most sections of the Coronavirus Act 2020 becoming law on 25 March 2020, the further measures being implemented on 23 April 2020 to suspend the recovery of rent to be included in the Corporate Insolvency and Governance Bill 2020 and more recently the planning measures announced on 14 May 2020.
Whilst these provide a welcome boost for many, some sectors consider that they do not go far enough favouring tenants (of both residential and commercial properties) over landlords, who are struggling with their own lending requirements whilst not being able to take advantage of the rates holiday available to tenants, which does not apply if the property is empty. Equally, not all tenants are benefiting from the current measures, in particular, those tenants who are not permitted to use their premises, such as retail and leisure and some nurseries and schools. There are also medical tenants who have been advised by their governing bodies not to treat patients unless it is an emergency and many face potential bankruptcy.
Questions continue to arise as to what will be the landscape within the property sector in a post lockdown market and this will continue to change as the Government introduces further measures to address issues for landlords and tenants alike arising from COVID-19.
Should you have any questions regarding the above information, or need any commercial property related legal advice, please get in contact with Thomas White, at email@example.com or on 020 7725 8045, Lara Nyman at firstname.lastname@example.org or on 020 7725 8054 or your existing contact within Seddons.